The tangled web of referral fees

29 June 2011

Referral fees: government is trying to reduce the money in the system

The furore over referral fees has come out of nowhere. In the past three weeks, the Sunday Times, the Daily Mail, the Sunday Telegraph and, this week, The Times with the help of Jack Straw, have all climbed into the trade in claims.

There has been an increasing focus on the role of insurance companies – referral fees’ most vehement critic – in actually fuelling them, which has certainly put the industry on the spot. The “if we don’t do it, everyone else will” argument put forward by the Association of British Insurers is not exactly an attractive one. I blogged recently on the conflict referral fees cause insurers that has now been so publicly exposed.

This was recognised at the costs conference for defendants organised earlier this month by Jaggards and Taylor Rose Solicitors, where one insurer raised the question of whether the industry should take a unilateral stand against referral fees, despite the financial hit it would cause. This has now happened with AXA’s announcement yesterday, but it would have been somewhat more powerful had it acted before Mr Straw raised such a public storm.

The scrutiny also has the potential to make life more uncomfortable still for insurers if the focus switches to what they get up to with third-party capture (and the people they pay to do that for them), which really would be an own goal.

But the fact is that none of the “revelations” of recent weeks has come as a surprise to those of us who have watched the market since the Law Society lifted the ban on referral fees in 2004. Having heard Mr Djanogly at the Jaggards conference and again on Radio 4 yesterday, there is no sign that the government will act quickly on referral fees. The focus instead is on using the Jackson reforms to reduce the amount of money in the system that can be paid as a referral fee. This may not eliminate referral fees but could reset them to a level deemed more palatable.

This publicity could, however, make the government more hardline about any concessions offered on the Jackson reforms during the progress of the Legal Aid, Sentencing and Punishment of Offenders Bill through Parliament, which has its second reading today.

But it will have some explaining to do. On the radio, Mr Djanogly talked about how under the current system the claimant is at no risk of paying anything even if they lose, which encourages people to sue (“the mechanics of the compensation culture”, he called it). Well, under qualified one-way costs-shifting in personal injury cases, the vast majority of claimants will still be at no risk of paying anything if they lose, so there’s not much gain there.

It is accepted that marketing costs are a reasonable element of legal fees, and the question to which we don’t know the answer is whether law firms would spend the same on more traditional marketing as they do now on referral fees if the latter were not an option.

The head of one large firm that does both personal injury and conveyancing (let us not forget that referral fees are not purely a PI phenomenon) told me this week that they probably wouldn’t spend quite as much, but then the outcome of advertising in the Yellow Pages and so on is far less certain than paying for a specific case that you know is a runner, so it’s worth paying out a bit more.

I have written before about the practical difficulties of a ban, which Mr Djanogly tacitly admitted on the radio. These include the advent of alternative business structures, which would allow a claims company to do the whole case from capture to settlement with no referral fee in sight – which may also help claims managers to avoid the heavier regulation that may be coming their way on the back of the sustained assault on their role in all of this, most recently from the health select committee yesterday.

In finding there is no regulatory case for a ban on referral fees, the Legal Services Board last month left it open to the government to decide there is nonetheless a public policy justification. The door has certainly been opened, and I’m sure they’re tempted to walk through, but just now ministers seem to be resisting the urge. The question is whether that will continue as the bill wends its way through Parliament and if the current welter of criticism stays the course.

5 Responses to “The tangled web of referral fees”

I think the focus on ‘referral fees’ has missed some important issues.

The furore has not been caused by the ability of solicitors to pay referral fees and outsource their marketing function. The fuss has been cuased by the unscrupulous use of accident victims’ personal information that has been sold to the highest bidder and has then lead to an acceptence in the market of ‘cold calling’ and ambulance chasing.

Had firm’s complied strictly with the provisions of rules 7 and 9 and ensured that they knew how referrers had obtained those details, and had the holders of such information not sold out then this situation would not have arisen.

There is no ‘furore’ about the use of referrals fees for conveyacning and I think that is a key point. Paying for referrals is an effective way of practices easily measuring and guaranteeing the effectiveness of their marketing budget. It is simply an example of effective outsourcing.

Lets shift the focus away from referral fees and onto the selling on of personal information and the use of ‘cold call’ marketing!

Love them or loathe them Referral Fees have had an enormous impact within the industry.

Ban them and they will resurface at another juncture perhaps completely de-regulated..

Lawyers are not the most marketing savy set and that is the key issue here, firms are using the referral trade as a simlistic way of buying business rather than develop it.

The insurance industry are trying to gain the moral high ground proposing a ban of referral fee and have failed to mask the fact that they really want their cake and eat it. The victims are already their clients.

The moral high ground in this case is under-pinned by a fork tounged beast.

Also, when insurers decided to sell their policyholder’s private data, did they make no checks on how the purchasers would use that information, or do the CMCs that most flagrantly breach the MoJ guidelines just pay the most?

If insurers lose the benefit of referral fees, how will they make up the shortfall in income generated by referral fees? Higher insurance premiums for the public or will insurers simply acquire law firms under ABSs and effectively deal with the claims in-house and replace referral fees with legal costs? Insurers will seek to replace the lost benefit through other means.

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